Bitcoin transaction fees and the decentralization of Bitcoin mining pools

In this paper, we propose a novel mechanism for decentralizing Bitcoin mining pools: the uncertain mining reward resulting from Bitcoin transaction fees. We present a simple model to demonstrate that risk-averse Bitcoin miners are more likely to allocate their computational power across multiple mining pools when transaction fees make up a large fraction of the mining reward. Our empirical study shows a negative relatinship between the proportion of transaction fees and the decentralization of Bitcoin mining pools. Our study suggests that an active Bitcoin trading market or a decreasing fixed reward from mining would lead Bitcoin mining pools to be more decentralized.